The 424 Dividend Boost — 12% Letter

“While most folks earn tiny 2%-6% dividends on Blue Chips (like Pepsi, Johnson & Johnson, and AT&T) savvy Americans are secretly “boosting” those small yields to dizzying heights – earning incredible 30%-50% on the exact same shares. Originally available only to executives at America’s richest Blue Chip firms, this income secret is now available to regular folks like you and me.”

Sounds pretty nice, eh?

I haven’t written about the ads from Stansberry & Associates too much lately, though they may be the most aggressive marketers out there … but in recent weeks I’ve seen lots of ads for Tom Dyson’s 12% Letter from Stansberry, and had several questions about what they’re calling the “424 Dividend Boost.”

So let’s have a look, shall we?

The ad focuses primarily on this “424 Dividend Boost,” which, as you can imagine, is an entirely invented term, but it also gets into some “private” high dividend yields (those have been disasters — I’ll explain in a moment).

So what is a “424 Dividend Boost?”

Dyson explains that there are only three things you need to do to participate in this “boost”:

Find the firms that offer this “boost” (only 20% do)

Contact them directly

Hold on tight and invest for the long term

Dyson also provides a number of quotes from respected sources to back up his claims …

Wall Street Journal:

“The Best Kept Secret on Wall Street”

“Securities and Exchange commission rules won’t let [these companies] say much about this fabulous way of saving and building wealth… And because brokers, fund managers, and other middleman can’t make any fees or commissions if you buy stocks directly from a company, you won’t hear about the secret from these middlemen.”

and …

“There are millions of people out there who want to do this, they just didn’t know they could”
Ed Middleton, National Association of Investors

So that is intended to convince you that this “boost” is real — and it is, though not perhaps in the immediate way you might imagine from reading the ad.

We get several examples from Dyson to support the incredible claims — the three claims at the top of the ad are as follows:

“Johnson and Johnson:
Current yield: 2.7%
With the “Dividend Boost”: 39%

“AT&T:
Current Yield: 5%
With the “Dividend Boost”: 43%

“PepsiCo:
Current Yield: 2.4%
With the “Dividend Boost”: 53%”

And he uses the stories of several individual investors — people who he or his copywriters have met over the years, I assume — to show that these promised returns are real.

“5% “boosted” into 43% — 74-year-old AT&T shareholder David Schaffer is another example. While most shareholders earn the company’s “usual” 5% dividend, Schaffer “boosted” his to an unbelievable 43%! That’s nearly 8-times bigger than normal. So far he’s profited more than $84,000!”

Sounds unbelievable, doesn’t it?

But it is, in part, real …

What’s that? Did I hear a question from the back of the room? Yes, raise your hand, please … mmm hmm, did everyone hear? The question was, “isn’t there a catch?”

Ah, there’s the rub. Yes, there is a catch.

It’s best described by two words that are anathema to most investors these days: “Time” and “Patience.”

You see, the “424 Dividend Boost” is nothing but another iteration of what Dyson used to call the “801K Plan” — it’s a teaser for investing in Dividend Reinvestment Plans, or DRIPs.

Using this strategy, you could certainly have put down an initial investment a few decades ago in a stock, like Johnson and Johnson or AT&T, and reinvested your dividends, to the point that the dividend you receive today is equivalent to a 40% or even much higher yield on your original investment.

That’s because of two things — raising dividends, and the compounding from dividend reinvestment. Most large American companies that pay dividends try very hard to raise those dividends every year, or at least keep them stable in bad years. That means if you bought shares in Johnson and Johnson back in 1970, for example, you would have received an annual dividend of just under a penny a share. Today, the annual dividend for JNJ is $1.84, so that’s incredible growth right there.

But the real power comes from dividend reinvestment — as those dividends climbed over close to 40 years, you could have turned each one into more fractional shares of JNJ, and the following quarter those fractional shares would have entitled you to slightly more dividend, so each quarter you would both add to your number of shares, and increase the dividend payment on each of those shares, which builds upon itself like compound interest, the force that Albert Einstein is reputed to have said (he almost certainly didn’t) is the most powerful force in the universe.

Just because Einstein probably said nothing about compound interest during his lifetime is no reason to dismiss it, of course — and Dyson does not perpetuate that famous cocktail party quote. It is something that we all know intuitively as investors, described more simply thus: Having your money make money is much more fun than having to make money yourself.

There are a lot of ways to reinvest dividends, of course — you can simply tell your broker to reinvest dividends for you, which many will do at no charge; you can collect the dividend money yourself in your cash account and reinvest it at your leisure, perhaps even choosing each month or each quarter where that money would best be placed, perhaps in the cheapest stocks you own; or you can invest directly through many companies in a direct purchase/ dividend reinvestment program.

Those direct DRIPs are really what is being teased here, and this is the version that is slightly more complicated, or at least cumbersome — the 424 part of the teaser refers to Rule 424 under the Securities Act, which deals with how companies issue prospectuses for selling their shares, though there’s no real reason you’d have to know that (Dyson hasn’t kept that much of a secret, to be fair, he wrote about it in Daily Wealth a couple months ago, and also explained the concept a bit in that article).

DRIP is the term commonly used to refer to programs whereby individual investors can purchase stock directly from the company itself, and let the company hold it and reinvest the dividends into more stock. A lot of large, consistent, dividend paying companies do this (the ones that used to be called “blue chip” or “widows and orphans” stocks before fear drove those terms out of common usage) — including firms like Johnson and Johnson, McDonald’s, Wal-Mart, and hundreds more.

Just about every single DRIP plan is different — some will sell you your initial share to get you started, others require that you already have a single share of stock registered in your name (but will often help you do that). Some charge fees either to get started, or to process monthly purchases if you enroll in an automatic investment plan; and others will give you discounts on the share price or reinvest dividends at a discounted price. Most of them have reasonable minimum investments, anywhere from $100 to $500, or require you to sign up for an ongoing automatic investment program.

So what are the benefits? Well, you get your dividends automatically reinvested, and you can often buy shares less expensively than you would through a full service broker (though some of them are more expensive than a rock-bottom discount broker).

The psychological benefit can be more powerful still: You’re probably not going to watch these shares every day or week (or hour) like you can in your online portfolio at your brokerage, and there are hurdles to selling your shares. Selling in these plans is often a little bit of a hassle, you sometimes have to write the company to sell stock, and they charge you a fee to clear your account — it’s often only $20 or $30, but still, it’s enough to slow you down. That, combined with the fact that it takes a few minutes to set up each plan, discourages investors from trading in and out of these stocks — and trading in and out is what typically punishes average investors, who are excited or scared by the movement of the Dow to buy or sell at precisely the wrong time (on average, that is — I know many of you do much better than that through your various trading strategies). Having this money squirreled away where you’re less likely to touch it means, if you choose the right stocks in the first place, that there is indeed a potential to build some wealth over time.

But remember that bit: Time. No Dividend Reinvestment program is going to make you rich in a matter of years, and these plans are really designed for long term investors who want to slowly build their stock holdings over decades, with some nice compound reinvestment of dividends to sweeten the pot.

And the downside is pretty much exactly the same as any other stock — typically investors choose to invest in DRIP plans in large, steady, dividend-growing companies, but that doesn’t mean these shares won’t go down. If you can wait ten years and are confident that these companies will survive, those down years just give you time to accumulate more shares at nice low prices, but that’s often something that’s psychologically challenging — it’s hard to throw good money after declining investments, even if (again, on average) it may well work out in your favor in the long run.

There is also some debate about whether it makes sense to enroll individually in all of these DRIP plans, or just to create a “synthetic” DRIP plan on your own — services like Sharebuilder will similarly allow you to invest a set monthly amount and buy fractional shares, and reinvest those shares, and free or cheap brokers like Zecco or TradeKing or Etrade or any of the others will charge small commissions to buy initial positions and (usually) let you reinvest your dividends for free, as will most brokers of any stripe.

Of course, if it’s in a Zecco or similar brokerage account you may find it harder to fight the temptation to trade in and out, and it can be hard to ignore those investments and let them build wealth for you if their gains and losses are staring you in the face every day. On the other hand, perhaps the next 20 years will be tough ones for building wealth through slow and steady investing, and you may be better off as an active trader, or at least selling losing positions quickly (that’s not necessarily my personal opinion, but it is a valid strategy and it would certainly have been a wise path to follow over the last few years for many companies).

There are many ways to look for DRIP plans if you’re interested in enrolling individually — you can look under the Investor Relations section of any company’s website and find them, though some trumpet their plans more widely than others (they’re not allowed to advertise them publicly, but many could certainly explain them better on their websites). You may have to look for terms like DSPP (Direct Stock Purchase Plan), DRIP, Buy Direct, Invest Directly, Buy Shares, or, for the truly obtuse, Transfer Agent. Most of these plans are managed through third party banks or transfer companies like Bank of New York or Computershare, so you could go to the listings of either of those companies to get a head start on finding DRIP or DSPP plans that you might find interesting. Computershare’s directory is here, and BNY Mellon’s listing is here.

Or, of course, you can sign up for Tom Dyson’s newsletter and get his favorite ideas for these stocks, or do likewise with a newsletter subscription from any of a half dozen other firms that sell DRIP plan advisory services, or you can buy directories of DRIP-eligible companies from most bookstores or online if you’d like someone else to do some of the initial legwork for you.

Dividends have provided a significant portion of the stock market’s return since the earliest days of the US markets, and they are now returning to vogue now that growth is feared and the equity crash has brought dividend yields back up to above-average rates compared to recent history. Jeremy Siegel has been pilloried in the last few days for his arguments that stocks are cheap and now is a great time to buy, but his historical studies going back to 1950 paint a very pretty picture for investing in big, stable, blue chip dividend-growth companies: The top stocks from 1950 to 2004 were ExxonMobil, Coca Cola, Altria, Kraft, and Reynolds American (all but one of those firms changed names and ownership structure a few times during that time, but Siegel did the appropriate math to account for that). The reason that those stocks were the top performers was not that they had the best growth in their sales, or even that they avoided having very bad years along the way — the reason they were the best, primarily, is that they all paid growing dividends, and dividends reinvested during bear markets provided magnified returns when the companies recovered. Of course, not all companies recover, and not all companies can grow for 50 years or more.

If you’ve got a favorite stock that you think folks should consider using in a DRIP investing strategy right now, whether it’s Wal-Mart or Verizon or one of perhaps a thousand others, feel free to share now in a comment below …

P.S. I forgot — I promised to mention that disastrous stocks that Dyson talks about at the end of this ad … I’ll be brief.

This second part of the teaser is about “Private companies that pay huge dividends,” and he talks about these high yield stocks as a way to benefit from private firms that you wouldn’t otherwise be able to buy shares of — he says he’ll explain it in a report called “Private Equitey Dividends”

These are the two companies he mentions:

“One of these “privately held” firms has paid a dividend every quarter – 42 consecutive dividends – since 1997 and increased the payout every single year. It’s boasted more than 325% in capital gains and has outperformed nearly 80% of U.S. public companies during that time. It currently pays an 18% dividend.

“Another of these “privately held” companies hasn’t missed a dividend since it began paying them more than 44 years ago. It’s raised the dividend 30 times, increasing its payout every single year. A $10,000 investment then would now be worth more than $12 million. This company currently pays a 16% dividend.”

This teaser is for Business Development Companies (BDCs), which I’ve written about before from time to time — unfortunately, it’s pretty poorly timed at the moment. Those two stocks (the top one is American Capital Strategies, ACAS, the bottom is Allied Capital, ALD) have been sucked down the drain by the credit crunch. I would have said nice things about these stocks a year or two ago, and they may end up surviving and thriving again, but the shares have been crushed, both are down about 90% on the year. ALD I think is still going to pay its fourth quarter dividend, last I checked, but it would be at an annual rate of well over 100% and they’re reportedly having liquidity issues, so don’t count on that dividend continuing. ACAS suspended the dividend for this quarter and will “reevaluate” each quarter going forward. Now might be an interesting time to get into these companies, which in recent history have been extremely remunerative for investors (especially ACAS), but it’s pretty clear the mid-market lending game has changed significantly this year, and it’s a gamble as to whether it will return to signficant profitability, or when.

Anyway, back to the question of the day — do you have a favorite dividend-paying stock that you think would excel in a DRIP plan for the decades ahead?

Share your thoughts...

GUMSHOE, what would we poor souls trying to sort the wheat from the chaff do without you!! The links you provide in this article are invaluable for one’s learning curve even though right now long-term investments with DRIPs may not be one’s primary investment concern. Thanks as always and I encourage any reader who is not yet an Irregular, a paying member, to support your efforts by remitting the pittance you ask to become one.

I HAVE A DIALUP, IT WOULD TAKE ME 19 HOURS TO DOWNLOAD THE SOFTWARE FOR THESE SITES, I TRIED, ANY SUGGESTIONS AS I AM INTERESTED IN THE BEST STOCKS WITH THE BEST DIVIDENDS, THANKS FOR ALL THE GREAT INFORMATIOM. You could also start out by just screening for the best big dividend growth companies in the country — but someone has already done that for you. The S&P Dividend Aristocrats index consists of the stocks in the S&P 500 that have consistently raised their annual dividend for at least 25 years (listing of those stocks is available here in a… Read more »

In regards to DRIP purchase of stock — the good news is that third party service providers are very inexpensive compared with brokers. The “bad” news is that the total transaction usually takes weeks and you are never sure of the price you paid until you get the notification from the stock transfer-DRIP account administrator. So trading via a DRIP purchase is probably not on. Have used the same third party for a number of years to purchase stock and have been satisfied with their service — but I buy and very, very rarely sell.

Another company worth a look is Yanzhou Coal YZC. YZC is the major coal provider in China and pays a 4.5% dividend. YZC is the most efficient underground coal miner in China. China is building coal fired plants at a breakneck pace and consuming all the domestic coal they can mine. YZC is trading at a PE of 2.5 and announced yesterday they are buying back 10% of their shares. Ranked #1 by Zacks.

Inter pipeline investment trust (IPL.UN:TSX) is paying an 11% yield right now… for those interested in dividends or distributions it might be worth a look. They pipe oil from the northern alberta oil sands, so it is a company that won’t run out of work! LOL

Rember back to Econ. 101 and TANSTAAFL. Readers of the Forum know we are in a Worldwide recession depression. Oil and N/G prices are falling with lack of demand. The trusts mentioned above and others fell 7.9% last week on the continued commodity price weakness. One trust, Baytex, BTE-un-T cut their distribution by 28%. I expect most others to follow. It may say 11% distribution. However, with a fall in stock market price and a cut in distribution, you may actually be under water for years. Caviet Emptor.

I think discount brokers allow automatic reinvestment without going the Compushare or other costly clearing houses. I have several of the Canadian trusts that are showing huge dividends because of the low curent price relative to previous dividend amounts. Charles Schwab will not reinvest those dividends and forces me to go to another brokerage. U.S. companies, however, are reinvested smoothly and timely.
As someone said, commodities are going south (for a while) and can leave the trusts underwater – drips or no drips.

Thanks for the information. In the old days, dividend reinvestment was way too complicated because of the noncomputerized bookkeeping required for tracking share purchase prices. Now it is easier, and I do reinvest some dividends in my full-service brokerage account. Most of my holdings are in Fidelity; I don’t know if they have a DRIP. Vanguard pools dividends for all those who want to reinvest, buys shares, and divides them up proportionally according to each account owner’s number of shares, from what I understand. Looking at the aristocrat list, I note that Wrigley has gone private, but I do own… Read more »

Considering how easy it is to do drip investing, seeing so many newsletters out there that claim to have the secret when its not asecret is funny. As it is Ive been dripping for 12 years and per this I started with $100 a month and now do $1000 and I also have been unemployed for 2 years. But I have 2 of my drips now doing income stream and they are litterally paying for the other drips so as to keep retirement plans good. When I work and get real income I go ahead and do what I need.… Read more »

I’m new to the stock market; started almost three years ago. I can’t put lots of money at once, couple hundred maybe. So day trading is not for me and I focus on high-dividend stocks that I enroll in DRIP (I use ETrade) and buy more when prices dip. My favorite is AOD. CMO is good, too but they pay quarterly. I had ACAS and sold them at trailing stop; had DHG and sold them when they cut dividends. I still have APL even though they stopped paying. Just bought CPLP and watch them carefully, since my sourses say their… Read more »

I just found your website and found your article on the 424 Dividend Boost very interesting. I have stocks in several companies you list but I receive regular dividends. Do I have to request the 424 dividend? Thank you for your help.

I bought stocks RSO end november, made a good profit on the stocks (40%) and received dividend. (20%). So far very good, (exception from my other stocks). They pay a high dividend.
Maybe too good to be true, so time to sell ????

I know I am new here to the Stock Gumshoe, but I would welcome any advice on any DRIP stock that any of you believe to be a great buy and hold at this point. I am on a fixed income and I have 2 children to put through college, and hoping the DRIP stocks that we currently have plus more and better ones if I can find them will help our cause greatly. It is beginning to seem like more and more people are catching on to the power of what the DRIP has to offer through compounding interest… Read more »

I've been doing this for several years now without really realizing what i was doing. I invest in REIT, every month they pay me dividends, and every 4 months or so, I take that money and buy more shares of that REIT. Those shares translate into more monthly income and so on. The concept has been working really well.

I would rather invest in emerging economies and strip profits off and do my own drip into these ‘safer’ blue chips. I tried this but have given up the drip. The emerging’s are far superior, even after dips, and investments should be left in them. The drip coys to me are well described: drips.
OK hands up, even I own drips.

Thanks Bob. In most cases, I personally think reinvestment through a broker is just as good as a direct DRIP investment from the company, though of course it depends on the broker — doesn't have to be a DRIP specialist like Sharebuilder, every broker I've used has reinvested dividends at a fair share price, for free and including partial shares, which is all I ask … there are a few companies who give you a small discount on reinvestment or similar inducements to buy direct, but there are also some who charge fees.

I received this offer in the mail today (2010). Daimler Chrysler was listed as one of the stocks. Maybe it is me but Chrysler was sold off several years ago and has since gone through a bankruptcy which wiped out all stockholder equity. Of course I lost a significant amount of money several years ago following Tom Dyson's penny stock advice. I think I will pass.

This article is so impressively done Travis. Congratulations on reaching the top level of the copywriting elite. Thank you so much for sniffing out these wolves (Thieves) dressed as sheep.Your service is so important to the Investing World.
You definately need to increase the price to at least $79.95 per year.
The cost and time invested intto running this site is getting to expensive and dropping your profit margin and free cash flow..Pleas raise the Price.!
Thank you for the value you bring to the Investing World.
Your Aces in my Book.!

Newsletters in This Article

Monthly newsletter that focuses on high-dividend stocks and similar investments. (Formerly edited by Tom Dyson, who left to found the Palm Beach Letter publications with Mark Ford)
This letter was merged into Stansberry's Income Intelligence letter, edited by Dr. David Eifrig.

ID’ing Cabot’s teased “#1 top dividend stock recommendation”

What’s this “Living Software” Business from Dylan Jovine?

This site and Stock Gumshoe publications and authors do not offer individual financial, investment, medical or other advice.
Nothing on this site should ever be considered to be personal advice, research or an invitation to buy or sell any securities. We also make mistakes and bad decisions sometimes, and our reasoning or data should be checked against trusted sources before they inform your investing decisions. Choices regarding how to invest your money or otherwise manage your life or finances are yours, we share only our analysis and opinion and all
authors or commenters are individually responsible for the words and opinions they share here. Please read our important disclaimers and policies. Stock Gumshoe is supported by subscribers and by sponsors and advertisers. Stock Gumshoe's employee authors will disclose holdings in any stock covered at time of publication and will not trade in any stocks written about for at least three days after publication. Please see below for complete disclosure, disclaimer and policy information.